Two Strong Energy Rebound Candidates

Buy recommendations Hugoton Royalty Trust (HGT) and Canadian Oil Sands Trust (COSWF.PK) offer particularly strong rebound potential when the current financial panic stabilizes. The two stocks have near the lowest McDep Ratios and have declined more depending upon the point from which it is measured. In fast moving markets, stock prices for low-debt entities may decline as fast as those for high-debt entities despite the lower risk for the former.

We have complete confidence in the financial strength of COSWF and all the no-debt income stocks that have no commodity hedges. We have reasonable confidence in the financial strength of an income stock with a Debt/Present Value ratio of 0.25. We have low confidence in the financial strength of the income stock with a Debt/Present Value ratio of 0.49. We have low confidence that all counterparties will live up to the terms of commodity hedges since Lehman has already defaulted.

A Reassuring Recollection

In the face of the continuing flow of dire financial news, we think of the dark days of 1974 when Wall Street was facing the loss of fixed commissions. As we recall, our friend and employer, Dick Jenrette had secured agreement for a critical capital infusion to Donaldson, Lufkin & Jenrette from the Saudi investor, the late Sulaiman Olayan. When the deal was struck, DLJ stock was $10 a share. When the deal was supposed to close, DLJ stock was $2 a share. Mr. Olayan honored the original terms, telling Dick effectively, “A deal is a deal.” With that vital support, DLJ survived and then prospered again in a new life.

Originally published on October 10, 2008.

Comments

[gebby:]

long and staying long hgt, coswf, pwe?

2008 Nov 03 04:48 PM

[Bobco23:]

Canadian trusts come with a future tax uncertainty, Canadian withholding, a declining Canadian dollar, and no potential for increased production. Check out the U.S. counterparts, BPT, PBT, SJT, and CRT and hold them in your self-directed IRA's if you can. I own all four. I did own HGT, PVX, and HTE. I hit a double with FDG on a take out by TCK, but the impending tax hit on closing forced my sale on the market at a discount. Canadian trusts come with a lot of unappreciated surprises. My advice is to stay away and seek comparble US entities.

2008 Nov 03 07:36 PM

[henarl:]

Agree with Bobco.

2008 Nov 03 10:14 PM

[anand:]

Kurt. What do you think about buying EPL here? Maybe below $3.30 a share? You use to like it.

It has good cashflow from operations. However only has $8 million in cash on hand . . . and its line of credit (30 out 150 million drawn) is tenuous with the global financial crisis.

It seems to cheap to pass up. If it could some how borrow $100 million and buy shares with it, that would seem like a no brainer.

2008 Nov 05 01:25 PM

[longoil:]

COSWF, ERF and PWE have all been consistently excellent performers for the last 8 years through the tech bubble, the housing bubble and recent oil price retreat.

The income trust conversion issue was factored into the share price as soon as it was announced. Canroys dividends have the added advantage of automatically hedging against the fall in the US dollar, since the are denominated in Canadian dollars.

2008 Nov 05 03:10 PM